Consumers Are Holding Back

Economic uncertainty has Americans postponing purchases of all manner of pricey items, from cars and homes to clothes and electronics

Shoppers aren't flocking to the mall anymore, preferring instead to stretch their dollar at discount retailers. Michael Nagle/Getty Images

by Pallavi Gogoi

Amy Welling would like to buy a house. And why not? She just got married last month, and what better way to start life as newlyweds than to move into a house you own together?

However, Welling and her husband, Michael, are so wary of the uncertain economy that after weeks of house hunting they have decided to continue to rent. The Wellings saw firsthand how many houses are on the market, some for as many as 20 months. And besides, they may be ready to pick up and relocate soon anyway: Welling, who is working two jobs, will graduate later this year with a master's degree in exercise physiology from Southern Illinois University in Carbondale, Ill., and she hopes that by next year her husband's PhD will be complete. "We don't want to be stuck with a house we can't sell," says Welling.

A large number of Americans seem to have entered a state of consumer paralysis. Whereas for years they had a bottomless appetite for McMansions, SUVs, big-screen TVs, and new wardrobes, today more people are hitting the pause button. If it's not would-be buyers like the Wellings holding off buying a home, it's the home sellers who are deciding to stay put rather than take a much lower price. Decisions are likewise being deferred on cars, electronics, and clothes.

Not Too Optimistic

The temperature readings that came out on consumers this week were almost uniformly bleak. Auto sales fell in the first two months of the year (BusinessWeek.com, 3/18/08), and J.D. Power & Associates predicts total U.S. sales in 2008 will total 14.95 million vehicles, which would be the lowest annual total since 1995. Retailers are struggling, from discounters such as Target (TGT) to midmarket department store chains like J.C. Penney (JCP) to Nordstrom (JWN) at the higher end. And even the top-performing electronics chain, Best Buy (BBY), has cut its fiscal 2008 profit forecast, blaming weak sales of TVs, digital music players, cameras, and video games. "People aren't going to buy cars or TVs when they are finding out that the value of their personal balance sheets are unclear," says Pat Conroy, vice-chairman of Deloitte & Touche USA.

That message came through loud and clear in the latest consumer confidence survey released on Mar. 25 by the Conference Board (BusinessWeek.com, 3/27/08). The index slumped in March, the third straight month of sharp declines. Its reading of 64.5 on a scale of 100 was the lowest since 2003. Consumer expectations about the future are at their lowest point since the recession in the early 1970s.

What's keeping some Americans up at night is uncertainty: about the fate of their employer, about steadily rising gas and food prices, and about their ability to handle huge credit-card bills or resetting mortgage rates. "Consumers are concerned about future job prospects, and the high level of gas and food prices has devastated the financial situation of lower-income households," says Richard Curtin, a University of Michigan research associate professor and director of the Reuters/University of Michigan monthly consumer survey, which will come out later this week.

Bulking Up

The only thing that people load up on these days are basic necessities (BusinessWeek.com, 1/17/08). They flock to stores where they can save money by buying items in bulk—places like Costco (COST), which reported earlier this month a 31% profit increase in its latest quarter, and BJ's (BJ), the warehouse-club chain that reported that its profit quadrupled in the first quarter. Sales of food and other grocery items increased at Wal-Mart Stores (WMT), giving its February retail sales a 2.6% boost.